Three Tips to Profit from Junior Miners

For the past several weeks, metals have been on fire in the land of penny stocks. Gold, silver and uranium stocks — no matter how speculative — have been showing traders impressive gains. In fact, throwing darts at this sector would probably have made you a good deal of money in November.

However, it’s important to maintain a set trading strategy, even in the most over-hyped sectors. As more traders and blind followers begin to seek out the next big uranium or silver trade, the more volatile the sector becomes.

To help keep you from becoming a bag-holder in the junior miner trading game, I have three key tips to booking consistent gains in junior miners:

1.    Take Profits Quickly: Remember, these hot uranium and precious metals stocks are not rallying for any fundamental reason. Most of the time, the stocks in this sector that are making the biggest moves don’t even have mining operations in place yet.

You should also beware of any press releases issued when the stock is soaring. The company could announce a new mineral rights purchase or discovery, or even a study showing how much metal could be in the ground and the revenue it could generate. No matter how promising these announcements seem, most operations are years away from beginning, yet alone becoming profitable. You should treat these announcements as you would a release from a biotech firm regarding a Phase 1 drug study: It could be great news, but it will be years before the drug is on the shelf (if it even makes it that far).

So when you see profits on the table, take them! Pigs get slaughtered — stay skeptical ,take the gains, and move on to your next trade…

2.    Don’t Chase Parabolic Moves: If a junior miner’s 1- or 5-minute chart looks like a hockey stick (in other words, a parabolic move), don’t get suckered in to buying shares — especially if it’s between 9:30 and 10 a.m. This is an emotional time frame where stocks can spike, only to settle into a more reasonable price range later on in the trading day.

You should be selling these spikes — not buying them. Look for specific breakout points, like when a stock is approaching a new 52-week high. Scan the sector for stocks that are close to breaking out, yet are not overextended. Buy at trendline support if you can confirm an uptrend, and anticipate the breakout. When the chart goes parabolic, book your gains while amateurs are left holding the bag.

3.    Find the Laggards: When a sector like precious metals or uranium heats up, there will be stocks that lead and stocks that lag. So don’t worry if you miss the initial rally, because the micro-cap leaders can give you great clues as to how the other stocks in the sector will behave.

After an initial rally from the sector leaders, you should add similar stocks, that didn’t move, to a watch list. Analyze these laggards’ charts as the days and weeks progress. If you notice a nice chart pattern forming, or a bullish volume trend, the laggard could be getting close to following the leaders. These breakouts can be just as explosive as the one you missed, and even more predictable.

There are still some nice looking set-ups in this sector. If you do your homework and create manageable watch lists (between 3-8 stocks — more if you think you can keep track of them efficiently) you will be prepared to make a successful trade when the market is open.

Sincerely,
Greg Guenthner
Penny Sleuth

December 3, 2010

Three Tips to Profit from Junior Miners was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

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